I wish you would stop advising people to do this. Or at least add a disclaimer that this should be an option only in catastrophic circumstances.
The idea is completely legitimate from how I see it (and doesn't require a "catastrophe") I guess we may have to spell it out for some people though.
If you have $5,000 and you don't have any in a ROTH IRA, then you can keep the $5,000 in a cash account doing nothing, while also incurring the opportunity cost of not contributing to your ROTH IRA. If you contribute to the IRA and an emergency hits, you can have the money in a few days at worst and pay no penalty. If the emergency never comes you have just maxed your current year ROTH contribution and get the tax benefits/return from that. You can also start saving towards a "more liquid" cash account emergency fund if your heart desires.
If you just keep the $5,000 in cash and the emergency comes, well, you are in the same place as you would be with the money in the ROTH, except you earned a shitty return the whole time. If the emergency doesn't come you just lost out on the year or years worth of returns on that money.
I think we assume some level of financial knowledge or we'd be here all day talking about not spending more than you make.
This post was edited on 2/12 at 10:08 am